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Peter D. Gordon, Esq. recently wrote this article for the Los Angeles
Business Journal in an issue devoted to Real Estate Development in
Southern California. The article deals with court enforcement measures
in connection with real estate purchase-sale agreements.

The present
real estate market creates an environment in which sellers now seek
to compel buyers to complete a purchase when loan funds are
unavailable or the buyer is otherwise unable to perform. However,
sellers must rely on general breach of contract rules which are
usually limited in most sales contracts by a liquidated damages
clause. On the other hand, California has developed a highly
regulated system for compelling a seller to complete a sale
transaction. The statutorily delineated
lis pendens
procedure is complex but it provides an instantaneous remedy to a
buyer by allowing him to place a lien on the title of the seller:
once a suit has been filed, and a notice of the lis pendens recorded
with the County Recorder’s Office, the lawsuit creates a cloud
on title preventing the seller from making another sale or obtaining
title insurance.

This article will briefly
outline the complexities, consequences and risks associated with
recording a lis pendens by a buyer. An experienced litigator,
familiar with this technical area of the law, is most suited to
undertake the prosecution of a specific performance case by means of
the recordation of a lis pendens--or to file to expunge an improper
use of such a lien.

Seller Repudiates Sale Agreement

Assume the buyer wants the
property since it is unique and the price is advantageous. Most
purchase agreements require that a mediation, followed by a binding
arbitration, must be pursued to enforce the purchase contract.
Nevertheless, a lawsuit may be filed specifically for the purpose of
recording a lis pendens, so as to create a lien on the property in
issue and preserve the prospective purchaser’s priority
position. A lis pendens is picked up by any title insurance company
and prevents the issuance of a title policy to any other prospective
buyer. Furthermore, once a lis pendens is on record against the
title of a specific property, it will remain there for the duration
of the entire action unless an expungement motion is brought under
the provisions of CCP § 405.30, etc.

Assume further that a lawsuit to
force the seller to convey the target property has been filed, a lis
pendens recorded, and the title is now clouded against any other
buyer.

“Probable Validity”

After three generations of
statutory refinements, CCP § 405.32 holds that a lis pendens
recorded by a plaintiff seeking specific performance of the sale
contract will be expunged if the claimant “has not established
by a preponderance of the evidence to probable validity of the real
property claim.” The “probable validity” standard
is drawn from attachment law in the world of provisional remedies,
which requires substantial factual support to the claim by the buyer.

Expungement of Lis Pendens

Inevitably,
once a lien is filed, then the defendant seller hires counsel to
remove – expunge out of existence – the lis pendens. The
expungement hearing involves a “mini-trial” of the case.
The expungement hearing judge is required to make an evaluation of
the overall merits of claimant’s/buyer’s case. The
requirement that the Court scrutinize the ultimate provability of the
plaintiff’s case is based on the fact that the recordation of a
lis pendens gives a claimant an immediate, de facto
lien on the subject property. In the mini-trial, the claimant
seeking specific performance must objectively establish the
probability of his real property claim or else suffer the expungement
of the lis pendens.

Bonding of the Lis Pendens: The Tail that Wags the Dog

In defending against the lis
pendens claim, if the claim is legitimate, the fixing of the bond
amount can prove to be pivotal. A large bond, say a million dollars
or more, may prevent a plaintiff from being able to post the bond.
Thus, even where the seller loses and the expungement motion is
denied, but only on condition that plaintiff must post a bond to keep
the lis pendens as a lien pending trial, the cost of the bond can
become an insurmountable hurdle. Consequently, the defense to a
lis pendens expungement may take the form of seeking a prohibitively
expensive bond, which in itself can prevent the plaintiff from
keeping the lien on title. Otherwise, the defendant seller seeks the
highest bond amount as the plaintiff/buyer’s cost of keeping
the lien on the property until trial.

Bond Is Adequate - Property Not Unique

Under CCP §
405.33, even if the plaintiff can show that he has a valid “real
property claim,” and meets the prerequisite of showing the
“likelihood of prevailing,” the lis pendens can be
expunged if the court finds that adequate relief can be secured to
the claimant – because the property is not unique – by
means of an undertaking in the form of a bond. Traditionally, a
single family home, if the purchaser intends to live in it, is
per se
deemed to be unique and thus a monetary bond would be insufficient.
However, most commercial properties, which can be substituted for by
another parcel, are not “unique” and thus can be bonded
around. Experienced counsel can try to argue that a particular
corner, or a particular set of improvements, does indeed represent
any irreplaceable opportunity, which would preclude expungement
predicated on a bond.

Risks Associated with a Lis Pendens

Normally,
the “prevailing party” in the lis pendens expungement
procedure is entitled to attorneys’ fees and costs under CCP §
405.38.
In a motion to expunge, if the owner/moving party prevails, he will
almost automatically be entitled to both attorneys’ fees and
costs. On the other hand, if the plaintiff/buyer is successful in
preventing the expungement of the lis pendens, then the buyer will be
deemed to be the prevailing party. Awards of fees and costs in this
type of expungement motion can exceed $10,000, representing a
cautionary concern. Furthermore, if the lis pendens is expunged, the
period of time during which the lis pendens was on title could also
create a basis of liability as against both the buyer/claimant and
his counsel for an action for slander of title. See Civil Code §
47(b)(4) and the case of
Palmer v. Zaklama
109 Cal.App. 4th
1367 (2003). Slander of title can result in a substantially higher
claim of damages by the prevailing seller.

A lis pendens creates an
instant cloud on title, but it brings with this “quick freeze”
lock on a property some serious risks.